Section 34 & 37 A&C Act | Judicial Review Limited to Patent Illegality; Limitation Commences Only on Clear Refusal of Performance : Karnataka HC

The Karnataka High Court, in a recent judgment, reaffirmed the narrow scope of judicial review under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996 (A&C Act). The Court dismissed a commercial appeal challenging an arbitral award, holding that the appellant failed to establish any patent illegality, perversity, or violation of public policy. The judgment underscores that courts cannot re-appreciate evidence or substitute their views for those of the arbitrator, even if another plausible interpretation exists.

Background & Facts

The Dispute

The appellant, A.R. Abdul Razak, along with two other landowners (P.D. Chandrakanth and Pushparaj Shetty), entered into a development agreement (Ex.P1) dated 27.10.2010 with Ashritha House Building Co-operative Society Ltd. (the Society). The agreement pertained to the development of lands situated at Hanchya Village, Mysore Taluk, for the formation of a residential layout and sale of sites to the Society’s members. Under the agreement, the Society undertook to obtain necessary approvals, develop the layout, and pay consideration for the developed saleable area initially at ₹495 per square foot, later revised to ₹620 per square foot. A General Power of Attorney (GPA) was executed in favor of the Society for project implementation.

Key Facts

• The Mysore Urban Development Authority (MUDA) approved the layout and released sites in three phases:
  • 73 sites on 01.09.2012
  • 23 sites on 28.02.2013
  • 25 sites on 08.11.2017
• The Society paid ₹13.83 crores to the landowners and executed sale deeds for 84 sites in favor of its members.
• Upon the Society’s demand to execute sale deeds for the remaining 37 sites, the appellant objected, alleging:
  • Unequal payment of consideration compared to other landowners
  • Delay in project performance by the Society
  • Entitlement to additional consideration and a larger share of sites

Procedural History

• 25.01.2019: The Society issued a notice demanding execution of the remaining sale deeds.
• 23.02.2019: The appellant refused to comply, citing grievances over payment and apportionment.
• A.C.No.196/2019: The Society invoked the arbitration clause in the development agreement, seeking a direction for execution of the remaining sale deeds.
• 31.08.2023: The Sole Arbitrator allowed the claim petition, directing execution of the remaining sale deeds at the agreed rate of ₹620 per square foot and rejecting the appellant’s counterclaim. The Arbitrator held that:
  • The Society had substantially performed its obligations under the agreement.
  • The delay in executing the remaining sale deeds was not attributable to the Society, as the final batch of sites was released by MUDA only on 08.11.2017.
  • The appellant’s grievance regarding unequal payment was an inter se dispute among the landowners and did not affect the Society’s contractual rights.
• Com.A.P.No.194/2023: The appellant challenged the arbitral award under Section 34 of the A&C Act before the LXXXVII Additional City Civil and Sessions Judge (Commercial Court), Bengaluru.
• 11.03.2025: The Commercial Court dismissed the petition, holding that the award did not suffer from any infirmity warranting interference under Section 34.
• Commercial Appeal No.318 of 2025: The appellant filed the present appeal under Section 37 of the A&C Act before the Karnataka High Court.

Relief Sought

The appellant sought to set aside the arbitral award dated 31.08.2023 and the impugned judgment dated 11.03.2025, primarily contending that the claim was barred by limitation and that the award suffered from patent illegality.

The Legal Issue

The central question before the Court was whether the arbitral award and the Commercial Court’s judgment suffered from any grounds warranting interference under Sections 34 and 37 of the A&C Act, particularly:

1. Whether the claim for execution of the remaining sale deeds was barred by limitation.
2. Whether the arbitral award was vitiated by patent illegality or perversity.
3. Whether the courts exceeded their limited scope of review under Sections 34 and 37.

Arguments Presented

For the Appellant

• Limitation: The claim was barred by limitation as MUDA had released 73 sites on 01.09.2012 and 23 sites on 28.02.2013, but the Society issued its first notice demanding execution of the remaining sale deeds only on 25.01.2019. The prolonged silence demonstrated lack of readiness and willingness, rendering the claim time-barred.
• Patent Illegality: The arbitral award suffered from patent illegality as it failed to consider the appellant’s grievance regarding unequal payment of consideration and the delay in performance.
• Re-appreciation of Evidence: The Commercial Court erred in not re-appreciating the evidence, particularly the conduct of the parties and the timeline of events.

For the Respondent-Society

• No Fixed Date for Performance: The development agreement did not prescribe any fixed date for execution of the sale deeds. The release of sites depended on compliance with statutory requirements imposed by MUDA, and the final batch of 25 sites was released only on 08.11.2017.
• Readiness and Willingness: The Society had demonstrated continuous readiness and willingness to perform its obligations. It had paid ₹13.83 crores and executed sale deeds for 84 sites. The notices issued and the conduct of the other landowners (Chandrakanth and Pushparaj Shetty) established their willingness to comply.
• Limitation Commences on Refusal: Under Article 54 of the Limitation Act, 1963, limitation commences when the plaintiff notices a refusal of performance. The appellant’s refusal was unequivocally communicated only on 23.02.2019.
• No Patent Illegality: The arbitral award was based on appreciation of evidence and did not suffer from any patent illegality or perversity. The Commercial Court correctly upheld the award under Section 34.

The Court's Analysis

The Court undertook a detailed examination of the scope of judicial review under Sections 34 and 37 of the A&C Act, relying on authoritative precedents to delineate the boundaries of interference.

Limited Scope of Interference Under Section 34

The Court reiterated that an arbitral award can be set aside under Section 34 only on limited grounds, as enumerated in the statute:

"Section 34 of the A&C Act provides that recourse against an Arbitral award may be made only on the grounds specifically enumerated therein. An Arbitral award may be set aside only if the party challenging the award establishes that: i. A party was under some incapacity; ii. The arbitration agreement was not valid under the law to which the parties had subjected it; iii. The party was not given a proper notice of the appointment of the arbitrator or the arbitral proceedings, or was otherwise unable to present its case, thereby resulting in violation of principles of natural justice; iv. The award deals with the dispute not contemplated by, or not falling within the terms of submission to arbitration or contains decisions beyond the scope of submission to arbitration; or v. The composition of the Arbitral Tribunal or the Tribunal procedure was not in accordance with the agreement of the parties or the provisions of the Act. vi. Under Section 34 (2)(b) of the A&C Act, an award may also be set aside if the subject matter of the dispute is not capable of settlement by arbitration or if the award is in conflict with the Public Policy of India."

The Court further noted that Section 34(2A), inserted by the A&C (Amendment) Act, 2015, introduced an additional ground of challenge for domestic awards: patent illegality appearing prima facie on the face of the award. However, the Supreme Court in Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India (NHAI) ((2019) 15 SCC 131) clarified that patent illegality must go to the root of the matter and cannot be invoked merely for erroneous application of law or re-appreciation of evidence.

Narrower Scope Under Section 37

The Court emphasized that the scope of interference under Section 37 is even narrower than under Section 34. Relying on MMTC Limited v. Vedanta Limited ((2019) 4 SCC 163), the Court held:

"The scope of interference under Section 37 is even narrower... The Appellate Court exercising jurisdiction under Section 37 cannot travel beyond the restrictions imposed under Section 34. The Appellate Court does not possess jurisdiction to undertake an independent assessment of the merits of the dispute or re-appreciate the evidence on record. Its enquiry is confined to examining whether the Court exercising jurisdiction under Section 34 acted within the parameters prescribed by the statute. Where an Arbitral award has been upheld by the Court under Section 34, the Appellate Court under Section 37 must be extremely cautious and slow in disturbing such findings."

Application to the Present Case

The Court analyzed the appellant’s contention that the claim was barred by limitation. The appellant argued that the Society’s prolonged silence from 2012/2013 until 25.01.2019 demonstrated lack of readiness and willingness, rendering the claim time-barred. However, the Court found merit in the Society’s submissions:

• The development agreement did not specify a fixed date for execution of the sale deeds. Consequently, the second limb of Article 54 of the Limitation Act, 1963 applied: limitation commences when the plaintiff notices a refusal of performance.
• The layout was developed in phases, and MUDA released the sites in three stages, with the final batch released only on 08.11.2017. The Society had completed the development work and secured release of all sites before calling upon the landowners to execute the remaining sale deeds.
• The Society’s conduct - paying ₹13.83 crores and executing sale deeds for 84 sites - was inconsistent with any abandonment of its rights. The notices issued and the willingness of the other landowners further corroborated the Society’s readiness to perform.
• The appellant’s refusal was unequivocally communicated only on 23.02.2019, marking the commencement of limitation.

The Court held that the Sole Arbitrator’s findings, affirmed by the Commercial Court, were neither perverse nor based on no evidence. A different interpretation of the same material was impermissible under Sections 34 and 37 of the A&C Act. The Court reiterated the principle that if the view taken by the arbitrator is plausible and founded on evidence, it cannot substitute its view merely because another view is possible.

The Verdict

The Karnataka High Court dismissed the Commercial Appeal No.318 of 2025, upholding the arbitral award dated 31.08.2023 and the Commercial Court’s judgment dated 11.03.2025. The Court held:

1. The claim for execution of the remaining sale deeds was not barred by limitation, as the cause of action arose only upon the appellant’s refusal on 23.02.2019.
2. The arbitral award did not suffer from patent illegality, perversity, or violation of public policy.
3. The Commercial Court’s findings under Section 34 were within the statutory limits, and the Appellate Court under Section 37 could not interfere.

What This Means For Similar Cases

Courts Cannot Re-appreciate Evidence or Substitute Views

This judgment reaffirms that courts exercising jurisdiction under Sections 34 and 37 of the A&C Act cannot:

• Re-appreciate evidence or reassess the merits of the dispute.
• Substitute their view for that of the arbitrator merely because another plausible interpretation exists.
• Interfere with findings of fact unless they are perverse, based on no evidence, or suffer from patent illegality.

Practitioners must ensure that challenges to arbitral awards are grounded in statutory grounds and not mere dissatisfaction with the arbitrator’s conclusions.

Limitation Commences on Clear Refusal of Performance

• Where a contract does not specify a fixed date for performance, limitation under Article 54 of the Limitation Act, 1963 commences only when the plaintiff notices a clear and unequivocal refusal of performance.
• Mere delay or silence, without an express refusal, does not trigger limitation.
• The conduct of the parties, including payments made and partial performance, is critical in determining readiness and willingness.

Arbitrators Are the Ultimate Arbiters of Facts

• Arbitrators are entitled to consider contemporaneous correspondence, conduct of parties, and surrounding circumstances while interpreting contracts.
• Courts cannot second-guess the arbitrator’s factual findings unless they are patently illegal or perverse.
• Disputes regarding apportionment of payments or inter se disputes among co-parties do not affect the contractual rights of third parties unless expressly provided in the agreement.